US producer price inflation increased to a 3.3% year-over-year level through December. Although that’s below expectations, it’s also the fastest pace since Feb. 2023. “Better than expected is not necessarily what the Fed wants to see before easing monetary conditions into a fast-growing economy, with tariffs and tax cuts on the agenda of the incoming administration,” says Carl Weinberg, chief U.S. economist at High Frequency Economics.
The US economy is still expected to post a slower growth rate in the upcoming fourth-quarter GDP report. But in a sign of confidence that a respectable expansion persists, the projected rate of expansion picked up in today’s nowcast vs. the previous estimate.
The US 10-year Treasury yield continues rising, trading at 4.79% on Monday, the highest since early November 2023. “Bond investors are sending a clarion call to the world’s fiscal authorities to get a grip on their budget trajectories, lest they be subjected to additional wrath,” says Tony Crescenzi, an executive vice president at Pimco.
The US economy added more jobs than expected in December, providing a fresh dose of optimism that the labor market will remain strong for the near term. There’s lots of uncertainty ahead as Trump 2.0 is set to get underway, but it’s fair to say that the incoming administration inherits a labor market that’s humming.
China’s trade surplus surged to nearly $1 trillion in 2024. Driven by strong exports, the news arrives ahead of expected US policy changes on import tariffs after President-elect Trump moves into the White House on Jan. 20. The New York Times reports: “When adjusted for inflation, China’s trade surplus last year far exceeded any in the world in the past century, even those of export powerhouses like Germany, Japan or the United States. Chinese factories are dominating global manufacturing on a scale not experienced by any country since the United States after World War II.”
● The Corporation in the Twenty-First Century: Why (Almost) Everything We Are Told About Business Is Wrong
John Kay
Review via Financial Times
When capital-intensive plant and machinery were the means of production, the capitalist elite had permanent power over the workers. But now control resides with professional managers who derive power not from ownership of the physical means of production or accumulated wealth but from their transient role in the business. Thus “the workers are the means of production” — and Kay’s italics are important.
Building on this, the importance of capital needs downgrading and redefining, argues Kay, a former FT columnist. In a suggestion that will jar with those actually running businesses or trying to start them up, the capital requirement of modern business is relatively modest. But it is difficult to argue with the observation that the modern IPO is more a means of enabling founders to extract capital than to raise it.
Inflation risk is topical again, as I’ve been discussing this week. As a result, the bond market is demanding a higher yield premium to compensate for the possibility that inflation will be higher than recent expected. The question for investors: Does the runup in Treasury yields to date suffice, given the current inflation expectations? In the first of a series of new indexes to help shed light on an answer, here’s a look at CapitalSpectator.com’s US 5-Year Yield Opportunity Index (YOI).
In an effort to combat deflation, China’s central bank temporarily stopped buying the country’s government bonds. The Peoples Bank Of China “may be attempting to signal to all market participants that rates have come down too low and too fast,” says Peter Alexander, founder of Shanghai-based consulting firm Z-Ben Advisors.
Inflation is relatively low compared with the post-pandemic surge, when the year-over-year change for the Consumer Price Index (CPI) peaked at 9.0% in June 2022. The current 2.7% pace through through this past November is tame by comparison. The concern is that inflation has turned sticky lately, just ahead of expectations for a Trump 2.0 regime shift in government policies that some economists predict could lift pricing pressure. The bond market, as a result, is increasingly demanding a higher risk premium via higher yields.
US jobless claims fell to 201,000 last week, lowest level in nearly a year. The historically low layoffs suggests a healthy labor market for the near-term outlook. “The Fed says rate cuts from here on out will be gradual,” says Carl Weinberg, chief economist at High Frequency Economics. “Today’s claims data say that they need not be in a rush to ease monetary conditions. Fed policy is aimed at supporting the economy and the job market before a recession shapes up.”
